Gaining and Sustaining Competitive Advantage - PowerPoint PPT Presentation

Gaining and SustainingCompetitive Advantage

Firm’ strategy should develop and exploit valuable, rare and costly-to-imitate resources, leading to sustained competitive advantage and above normal performance

• Strategy formulation, not implementation
• No ‘silver bullet’, ‘magic formula’
• A bit of luck
• Proactive vs. reactive

• …a firm’s theory about how to compete successfully. (J. Barney)
• …the way to achieve organizational objectives. (Hatten & Hatten)
• …commitments and actions designed to exploit core competencies and gain competitive advantage. (Hitt, Ireland & Hoskisson)
• …a plan that specifies which choices (the player) will make in every possible situation. (Von Neumann & Morgenstern)

• Competitive advantage - when strategy (1) is consistent with underlying economic processes, (2) creates value, and (3) is unique or rare.
• Competitive parity - when strategy (1) is consistent with underlying economic processes, (2) creates value, but (3) is not unique or rare
• Competitive disadvantage – when strategy fails to create economic value.

Company Profile( SWOT )

Mission

Objectives

Strategies

Tactics

Industry & Environmental Analysis ( SWOT )

• Mission - Fundamental purpose, how firm differs from its rivals
• Objectives - Measurable performance targets, financial and/or strategic
• Strategies – means, plans or commitments to achieve a firm’s mission and objectives
• Tactics - Actions or policies to implement strategy
• Company Profile – strengths and weaknesses of a firm
• Environmental Analysis – opportunities, threats, characteristics and trends of the industry and society

• Benefits of having a mission statement
• unanimity of purpose
• employee motivation
• culture / focal identity
• allocating resources
• Disadvantages of mission statement?
• Improved performance?
• Why don’t all companies have mission statements?

• Primary market or technology
• Goals: growth, profitability, survival
• Basic beliefs, company philosophy
• Public image, self-concept
• Customers
• Quality

“Enhancing quality of life through an integrated health service organization based on a balanced program of patient care, education, research and community service.”

“To bring inspiration and innovation to every athlete in the world.”

‘The mission of Southwest Airlines is dedication to the highest quality of customer service delivered with a sense of warmth, friendliness, individual pride, and company spirit”.

Dell's mission is to be the most successful computer company in the world at delivering the best customer experience in markets we serve. In doing so, Dell will meet customer expectations of:

• Highest quality
• Leading technology
• Competitive pricing
• Individual and company accountability
• Best-in-class service and support
• Flexible customization capability
• Superior corporate citizenship
• Financial stability

The University of Nevada, Las Vegas, located in the vibrant and dynamic city of Las Vegas and surrounded by the Mojave Desert, is emerging as a premier urban university. UNLV’s development embraces the traditional values of higher education adapted for the global community of the 21st century. The university increasingly will concentrate its resources on programs that are student centered, demonstrably excellent, and responsive to the needs of the local and regional community.

UNLV promotes an environment that encourages the full personal and professional development of those it serves and of those who serve the university. UNLV assists students in meeting the intellectual and ethical challenges of responsible citizenship and a full and productive life through opportunities to acquire the knowledge and common experiences that enhance critical thinking, leadership skills, aesthetic sensitivity, and social integrity.

The university provides traditional and professional academic programs for a diverse student body and encourages innovative and interdisciplinary approaches to teaching, learning, and scholarship. Recognizing the individuality of each student, UNLV simultaneously engenders collegial relationships and a sense of community among its members. UNLV embraces the interdependence of quality instruction, scholarly pursuits, and substantive involvements in campus and community life.

The university offers artistic, cultural, and technical resources and opportunities to the broadest possible community. It promotes research programs and creative activities by students and faculty that respond to the needs of an urban community in a desert environment.

UNLV is committed to developing a synergy between professional and liberal studies, between undergraduate education and graduate programs, and between superior teaching and meaningful research. UNLV increasingly is a dynamic resource for, and partner with, the community that it serves.

The general strengths and weaknesses of a firm

• Performance and Financial position
• Leadership
• Org. structure
• Culture
• Strategic issues by functional area
• Value chain

Opportunities, threats, characteristics and trends of the industry and society

• Industry characteristics analysis
• Porter’s Five Forces Model
• Stage of industry evolution
• Stakeholder analysis
• Environmental assessment
• Competitor analysis

• Purpose of setting Objectives is to:
• convert mission into performance targets
• create yardsticks to track performance
• establish goals that require stretch
• push firm to be inventive, focused

• Set challenging but achievable objectives, but guard against:
• Complacency
• Drift
• Internal confusion
• Status quo performance
• Financial and strategic objectives

• Objectives that relate to improving firm’s financial performance
• Examples
• increase ROI from 15% to 20%
• maintain AA bond rating
• increase earnings growth from 10% to 15%
• Other examples?

• Improvement in competitiveness or market position
• Examples
• Increase market share from 15% to 18%
• Surpass rivals on customer service
• Achieve lower cost than competitors
• Achieve technological superiority
• Other examples?

• Business strategies (competitive)
• Corporate strategies (alliances, M & A)
• Porter’s generic strategies – “ …the general strategic orientation of the firm.”
• Cost leadership
• Differentiation
• Focus or niche
• Emergent strategies

• Actions to implement strategy
• Policies and procedures to get line employees to follow the firm’s strategy
• “Messy” issues of strategy implementation, not formulation

Measuring Performance

Organizational performance is a complicated concept – multiple methods, each with different uses and flaws

• “Performance Test” (Thompson & Strickland)
• Strategy fits firm’s environment
• Builds competitive advantage
• Improves strategy performance measures
• Common measures of strategy performance
• Change in firm’s market share
• Trend in profit margins relative to rivals or industry average
• Composite measures of financial strength
• Trend in firm’s stock price
• Firm’s reputation with its customers
• Product quality
• Service quality
• Employee satisfaction / morale

• Return on invested capital (ROIC)
• Economic profit (EP)
• Market value added (MVA)
• Tobin’s q

Note: these measures can be difficult to compute

and more appropriate to finance than

strategy. Our interest is in developing

an intuitive understanding – how they

compare, contrast and can be used.

• The return or profit a firm makes on the investment it has in its operations

+ current assets

+ fixed assets

- net other assets (other assets – other liabilities)

- non-interest bearing current liabilities (A.P.)

Invested capital

• Reports, in dollar terms, the actual economic profit the firm made

EP = Invested capital x (ROIC – WACC)

note: ROIC and WACC are percentage terms.

If the difference is positive, EP will also be

positive.

• Measure that characterizes the long-term performance of a firm

market value of equity

+ market value of debt

- economic book value

MVA

note: this measure is also difficult to calculate,

especially determining the amount invested

in the firm since inception.

• Ratio of a firm’s market value to replacement cost of its assets

q = firm market value / firm book value

where market value of common stock

+ market value of preferred stock

+ book value of short-term debt

+ book value of long=term debt

firm market value

• Industry and sector data often readily available
• Comparison with past performance
• Stage of industry evolution
• Benchmarking with competitors
• US and industry averages
• Industry success factors

Evaluating Environmental Threats

A firm’s strategy should neutralize

environmental threats.

Company Profile( SWOT )

Mission

Objectives

Strategies

Tactics

Industry & Environmental Analysis ( SWOT )

• Origins of the Structure – Conduct – Performance Model
• Tools to evaluate environmental threats
• Industry characteristics analysis
• Stakeholder analysis
• Porter’s Five Forces Model
• Competitor analysis

Number of competing firms, homogeneity of products, cost of entry and exit

Industry Structure

Price taking, product differentiation, tacit collusion, exploit market power

FirmConduct

Firm: above, normal, belowSociety: social welfare implications

Performance

Large number of firms, homogeneous products,low cost of entry and exit

Industry Structure

Price taking

FirmConduct

Firm: normalSocial welfare: maximized

Performance

Industry Examples?

Large number of firms,heterogeneous products,low cost of entry and exit

Industry Structure

Cost leadership,Product differentiation

FirmConduct

Firm: above normalSocial welfare: less than perfect competition

Performance

Industry Examples?

Small number of firms,costly entry and exit

Industry Structure

FirmConduct

Many options, including collusion

Firm: above normalSocial welfare: less than monopolistic competition

Performance

Industry Examples?

Only one competing firm,costly entry

Industry Structure

FirmConduct

Uses market power to set prices

Firm: above normalSocial welfare: less than oligopoly

Performance

Industry Examples?

Market growth rate

Number and size of rivals

Scope of rivalry

Number and size of buyers

Number and size of suppliers

Substitute products

Ease of entry / exit

Distribution channels

Economies of scale

Learning curve

Capacity utilization

Average industry profitability

Pace of technological change

People or groups who have an interest, claim, or stake in how well the firm performs

shareholders managers

employees customers

suppliers government

unions community

general public

What determines the degree of industry competitionand profitability?

Threat ofentry

Threat of rivalry

Threat ofsuppliers

Industry profitability

Threat of buyers

Threat of substitutes

• Economies of scale
• Product differentiation
• Cost advantages independent of size

(Technology, know-how, access to raw materials, geographic locations, learning curve)

• Contrived deterrence
• Government policy
• Capital requirements *
• Switching costs *
• Access to distribution channels *

* Some disagreement among scholars

• Many competitors
• Similar in size
• Slow rate of industry growth
• Product lacks differentiation
• Capacity added in large increments
• High level of fixed costs
• Exit barriers are high
• Reputation or past history

• Products that appear to be different but satisfy the same need
• Customer switching costs are low
• good examples butter vs. margarine

calculators vs. slide rules

tape b/u vs. CD burner

• bad examples Coke vs. Pepsi

Honda vs. Toyota

• Small number of buyers
• Purchase products that are standard or undifferentiated
• Industry products represent a large share of buyer’s total cost
• Unimportant to final quality of product
• Product does not save the buyer money
• Buyer may integrate backward

• Supplier has few competitors
• Supplier offers a unique product
• Substitutes not readily available
• Supplier can integrate forward
• Firm or industry purchases represent small share of supplier’s total sales

Evaluating Environmental Opportunities

A firm’s strategy should exploit

environmental opportunities

Company Profile( SWOT )

Mission

Objectives

Strategies

Tactics

Industry & Environmental Analysis ( SWOT )

• Separation of opportunities and threats
• Tools to evaluate environmental opportunities
• Industry structure
• Industry evolution
• Strategic group analysis
• Environmental assessment

Determinants of success may differ depending on the stage of industry evolution

Emerging

Newly formed – innovations,

changes in demand, needs

Rapid increases in capacity and

unit sales, dominant technology

emerges

Growth

Maturity

Slowing growth rate, increased

competition, experienced

customer base.

Decline

Consistent decline in unit sales,

overcapacity

What does it take to succeed in the

Introduction / Emerging stage?

• Technological leadership
• Experience curve
• Dominant technology
• Preempt strategically valuable assets
• Create customer switching costs / loyalty

Industry Examples?

What does it take to succeed in the growth stage?

• Marketing and promotion aimed at brand recognition
• Expanding the product line
• Financial strength to accommodate growth
• Strong marketing channels

Industry Examples?

What does it take to succeed in the mature stage?

• Product refinement – extensions, packaging
• Emphasis on process innovation
• Lower costs
• Higher quality
• Differentiation / emphasis on service
• Horizontal integration
• International expansion

Industry Examples?

What does it take to succeed in the declining stage?

• Market leadership
• Focus on growth segments – niche strategy
• Emphasize production and distribution efficiency
• Gradually harvest the business
• Prune the product line
• Preferred customer selection
• Defer equipment maintenance and repair
• Divestment

Industry Examples?

Strategic group – a subset of firms in an industry that appear to compete on similar dimensions.

Examples: Mercedes, Acura, Lexus

Timex, Casio, Polar

Nike, New Balance, Asics

Plotting a strategic group map:

(1) Identify relevant dimensions

(2) Locate firms

(3) Group nearby firms

(4) Look for potential opportunities

Nike

Quality

Asics

NB

Converse

Keds

Number of Models

Monitoring early signals, changes or trends in the firm’s external environment; anticipating or forecasting these trends; assessing how these changes or trends will affect firm operations.

Major components:

• Demographics
• Economic
• Political / legal
• Socio-cultural
• Technological

Evaluating Firm Strengths and Weaknesses

A firm’s strategy should exploit firm strengths while avoiding or correcting weaknesses

• Theories of distinctive competence
• General managers – their decisions have great impact
• Pros – high appeal and validity
• Cons – positive traits are ambiguous
• Institutional leadership - creates vision, organization and structure
• Pros – intuition, strong appeal
• Cons – sr. managers not only source of advantages

• Ricardian Economics
• Little role for management
• “Original, indestructible gifts of nature” (land)
• Inelastic supply function
• High quality factors of production
• Pros: quantitative, testable theory

numerous resources are inelastic

• Cons: natural shift in demand curve

other contributing factors

• Penrose’s Theory of Firm Growth
• administrative framework
• bundle of productive, heterogeneous resources
• Pros: introduced heterogeneity

broad definition of ‘productive resource’

• Cons:

Other theories of the firm

• Population Ecology
• Transaction cost
• Agency theory

• Dominant theoretical perspective
• Resources, capabilities, competencies
• Assumptions
• Resource heterogeneity
• Resource immobility
• Firms are bundles of productive resources
• Financial capital
• Physical capital
• Human capital
• Organizational capital

• Value – when resources and capabilities enable the firm to respond to threats and opportunities
• Rarity – when resource is controlled by a small number of competing firms
• Imitability – the degree that the resource can be duplicated or substituted
• Organization – how the firm is structured, organized and managed to exploit valuable, rare and costly to imitate resources.
• Some examples

* Assumes firm is organized to exploit resource

• Broader responsibility for competitive advantage
• Better to exploit firm’s existing valuable, rare and costly to imitate resources, rather than mimic other successful firms
• Relative cost of difficult to implement strategy should be compared to its value
• Socially complex resources can be source of competitive advantage
• Firm’s structure, control systems and compensation policies should change if they conflict with firm’ resources or capabilities

• Sustained competitive advantage and unexpected environmental change (Shumpeterian revolutions)
• Managerial influence – imitability paradox
• Unit of analysis shifts from industry to intra-firm (consider value chain example)

Generic Strategy: Cost Leadership

A cost-leadership strategy attempts to gain competitive advantage by reducing production or service costs below those of competitors

• Economies of scale
• Specialized machines
• Cost of plant and equipment
• Employee specialization
• Overhead
• Diseconomies of scale
• Physical limits to efficient size
• Managerial diseconomies
• Worker motivation
• Distance to markets and suppliers

• Learning curve

(learning curve v. economies of scale)

• Access to factors of production

(land, labor, capital, raw materials)

• Technological hardware

(other than what is used for production)

• Technological software
• Policy choices

(choices about which products/services to offer)

• Reduces threat of entry – how?
• Reduces threat of rivalry – how?
• Reduces threat of substitutes – how?
• Reduces threat of suppliers – how?
• Reduces threat of buyers – how?

Factors of production

Technological software

Diseconomies of scale

Policy choices

Economies of scale

Technological hardware

More likely to be rare

Less likely to be rare

Factors of production

Policy choices

Technological hardware

Learning curve

Diseconomies of scale

Economies of scale

Costly to duplicate

Less costly to duplicate

Technological software

Factors of production

Policy choices

Technological hardware

Learning curve

Diseconomies of scale

Economies of scale

• Simple U-form structure

(few layers, small staff, narrow range of business)

• Tight management control systems

(close supervision, quantitative goals, cost-leadership orientation)

• Compensation policies

(reward for cost reduction, incentives for all)

Generic Strategy: Product Differentiation

A product differentiation strategy attempts to gain competitive advantage by increasing the perceived value of products or services relative to that of the competition

• Product features
• Intra-firm linkages
• Timing
• Location
• Product mix
• Inter-firm linkages
• Reputation
• Product customization
• Product complexity
• Consumer marketing
• Distribution channels
• Service and support

Conceptual

Empirical

Distribution channels

Intra-firm linkages

Timing

Location

Service and support

Inter-firm linkages

Product customization

Product mix

Consumer marketing

Product complexity

Product features

Costly to duplicate

Less costly to duplicate

Product differentiation leads to increased sales, which lead to economies of scale, learning and other cost reductions

Empirical research supports dual strategies

Porter has backed off the “stuck in the middle” argument

The Cons…..

Requires different organizational structures

Management control systems differ

Differences in compensation policy design

Strategic Alliances

Types of alliances, sustained competitive advantage, and “cheating” in alliances.

Alliances

• exist whenever two or more independent firms cooperate to develop, manufacture or market products or services
• are governance mechanisms between the spot market and organizational hierarchy
• rapidly growing form of governance
• Non-equity Alliances
• Equity Alliance
• Joint Venture

• Economies of scale
• Learning from competitors
• Sharing risks and costs
• Facilitate tacit collusion
• Low-cost market entry
• Low-cost industry entry
• Low-cost exit
• Managing uncertainty

• Adverse selection – partner misrepresents skills and abilities
• Moral hazard – partner has high quality skills and abilities, but invests lower quality than promised
• Holdup – partner exploits “transaction-specific investments that other partner(s) make

Some examples…

Evaluation of competitive advantage follows VRIO framework.

• Value: NPV ( firm A + firm B ) > NPV ( A ) + NPV ( B ) i.e., synergy exists
• Rare: depends on the number of competing firms as well as the benefits.
• Imitability: alliances can be imitated by direct duplication and substitution
• Organization: to minimize “cheating”; the key to success

• Explicit contracts
• Legal sanctions
• Equity investment
• Firm reputation
• Joint venture
• Trust

Selecting Appropriate Strategies

Strategy should neutralize threats,exploit opportunities and strengths,address firm’ weaknesses

Vertical integration

Cost leadership

Product differentiation

Flexibility

Tacit collusion

Generic Strategies

Corporate strategies

Strategic alliance

Corporate diversification

Mergers and acquisitions

International strategies

• Follow the leader
• Hit another home run
• Arms race
• Do everything
• Losing hand / Sunk cost
• Stuck in the middle

• Re-examine SWOT analysis
• compare expected outcomes to objectives
• construct corporate scenarios
• Consider other behavioral factors
• Current or past strategy
• Degree of external dependence
• Attitudes toward risk
• Internal politics
• Timing
• Competitive reaction